Will IOLTA Programs Be Victims of the Wall Street Crisis?

IOLTA programs — “Interest on Lawyer Trust Accounts” — gather together small amounts of interest on certain accounts in which lawyers hold client funds, building a much larger pool of funds that can be used to fund legal services for the poor. Because it collects small sums that the clients otherwise wouldn’t miss, it’s somewhat like the banking software from Superman III copied by the guys in Office Space. But legal. And used for a good purpose.

In Texas, banks holding IOLTA accounts have had the option of pegging the interest they pay on these accounts to the Fed Funds rate.

You don’t have to be watching CNBC every day to know that the Treasury and Fed have been trying their hardest to lower interest rates, while investors have been fleeing to the perceived safety of government bonds. The result is a Fed Funds rate hovering around 0.10%. (( According to numbers provided by the New York Fed, the Fed Funds rate stood at 5.25% when 2007 began. During 2007, the Fed knocked 1.00% off the Fed Funds rate. In 2008, it knocked another 4.00% to 4.25% off the Fed Funds rate. Before December 16, 2008, the Fed Funds rate was a fixed amount. When the Fed cut the rate that day, it created a new “target” range of 0.00% to 0.25% rather than a fixed rate. The market determines the rate, and it’s now trading at around 0.10%. ))

Which means that the banks have been paying less interest on these IOLTA accounts, too. How much less?

Revenue from the lawyer-trust accounts has fallen from $20 million in 2007, to slightly more than $12 million last year, to projected revenue this year of $1.5 million without the amendment. Justice Oâ€™Neill predicted the amended benchmark calculation will raise this yearâ€™s projected yield to $3 million, still far below what is necessary to meet the increasing needs.

According to the advisory, banks who had been lowering their IOLTA interest rates down close to zero may have to raise those rates to 0.65%. (( Banks had the choice of offering the same competitive market interest rates that they offered depositors or — as a “safe harbor” — a rate pegged to the Fed Funds rate. Now, banks who choose the “safe harbor” option will have to pay the greater of 0.65% or 65% of the Fed Funds rate. So, until the Fed Funds rate again exceeds 1%, the banks may face a floor of 0.65%. )) The order itself contains more details.

The sharp drop in IOLTA revenues projected for 2009 is stunning. I hadn’t given thought to how these rate cuts would affect IOLTA accounts. This could be a crisis situation for Texas and the other states that fund legal services for the poor at least partially through IOLTA accounts. And, if you trust Wikipedia, that means everybody — “every state in the country, the District of Columbia and the U.S. Virgin Islands operate IOLTA programs.”

The bad news is that lawyers may be making less money themselves in this down market pitch in. The good news, such as it is, is that they may have more time to offer.